'redirected walking'. This has been used in practice by some of the big VR applications and in research since them. As I understand it, the problem is that it doesn't solve the 'small living room' effect because you can only distort by a few degrees and this produces a circle of like 15 meters - so works in a sort of warehouse setting but not in normal buildings.
There's also the more expensive idea of an "infinite 2D treadmill" - which was first implemented by a guy named Rudy Darken; iirc, he did it for the "dismounted soldier" VR/AR training project for DARPA:
http://dl.acm.org/citation.cfm?id=1246853